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How rich would you be if you picked the best share performer every day? Ross Clark gets out his crystal ball.
One thing I love doing at this time of year is reading through the predictions made 12 months ago by all sorts of “experts”. Most were so woefully inaccurate they must wish they could be removed from the internet. It is a world where Donald Trump was never elected, “remain” won the referendum and Leicester City failed at the last stage to land the Premier League title.
If experts were really any good at predicting the future, they could prove it by becoming very rich, very quickly. And they wouldn’t even need to be able to see more than 24 hours ahead.
For the month of December, I decided to play a fantasy stock market game: I invested an imaginary £1,000 every day in the share that had proved to be the best-performing one in the FTSE All-Share index that same day — a sadly impossible type of after-the-event investing.
On December 1, for example, the oil company Enquest was the best performer, up 19.3%, so my “fantasy” £1,000 was worth £1,180 after dealing costs.
I then took that money and put it into the following day’s best performer, Berkeley Group, up 8.45%, and so on. I repeated the exercise every day of the month, investing whatever I had been left with from the previous day’s rollercoaster.
I conducted two other experiments on the sidelines. Another fantasy £1,000 was invested in the worst-performing share, and a third £1,000 in a share I had picked the evening before, guessing it might do well the next day.
Of course, holding shares for just 24 hours isn’t a sensible investment strategy. My imaginary investments found themselves fighting the headwinds of daily trading fees. For the purposes of this exercise, I subtracted £5.95 every time I bought or sold a share — that being the fee charged by Hargreaves Lansdown for frequent traders who trade 20 or more times a month. But I ignored the bid-to-offer spread — the difference between the price at which you can buy a share and that at which you can sell.
The results of my after-the-event investment strategy were pretty spectacular.
At the end of the FTSE’s final trading day on December 30, when it closed at what was then an all-time high of 7,143, my pot reserved for buying the best-performing shares was worth £9,441. If only investing in the stock market was always a story of such rapid success.
As for my attempt to pick a share that would do well the next day, the result gives you a guide as to why most of us — professional psychics and mediums included — would be unwise to give up our day jobs and become day traders.
By the end of the month, my pot had eroded to just £726. It wasn’t helped by having paid a total of £238 in trading fees over the month.
My personal highlight came on day two, when I saw that Berkeley Group was announcing its results the following morning and I guessed they would be better than the market had been expecting, housebuilders’ shares having been pummelled more than any others in the aftermath of the vote for Brexit.
Not only was I right but I hit the jackpot on only my second attempt: Berkeley topped the FTSE All-Share the following day.
That, however, was not to be repeated. On December 5, in the wake of the Italian referendum and panic over that country’s banks, I guessed gold would do well and so picked Fresnillo, one of Mexico’s largest gold producers.
My crystal ball had apparently seen only a metals company beginning with F. The iron-pellet manufacturer Ferrexpo topped the FTSE All-Share with an 11.3% rise, while Fresnillo plunged by 4%. That week, I lost money on four out of five days.
As for always taking the worst share, I was surprised how long my £1,000 lasted. Nevertheless, on December 21 I finally ran out of money, my holding in Game Digital being worth less than the £5.95 it would have cost me to sell it.
My nadir in personal picks was on December 14, when I chose Premier Oil, thinking the previous day’s falls in oil stocks would be reversed, as they so often are.
Instead, Premier tanked by a further 4.8%, the second- worst drop in the FTSE All-Share. Thereafter, I pretty well gave up on reasoning and chose shares at random, or ones whose names I liked.
I won’t be taking up a new career as a day trader, or as a psychic. But my exercise in after-the-event investing has taught me a few things. First, it shows the power of compound gains. Second, it shows the pointlessness of trying to predict winners in the stock market. I made a correct judgment once. More often I failed — or simply couldn’t see any case to pick out a particular share.
Above all, it confirmed what I already knew: that the best approach for the vast majority of investors is to invest in a tracker fund or a wide spread of shares and hold them for the long term.
Anyone who has money invested in a FTSE All-Share tracker fund would, on December 31, have had £1,053 for every £1,000 they invested on December 1. I would have settled for that performance.
